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Restaurant construction is red hot despite thinning traffic

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The weakening U.S. economy has taken a bite out of consumers' pockets, slowing the pace at which they dine out. Yet restaurant construction and renovation appears unfazed, for now anyway, sparking additional growth in the use of stainless steel for restaurant kitchens.

"The out-of-home market has slid a bit," Keith Gellman, president of Restaurantchains.net, an Irvington, N.Y., market research firm, said. "People are not going out at the frenetic pace as they were."

Yet no matter how bad the economy gets, individual appetites remain voracious, so people continue to dine outside their homes, he said.

"I believe it's a blip," Gellman said. "People have to eat and they'll continue to eat out. They don't just stop. It's not bad news, just slower news."

End-market growth in the restaurant industry is driven by disposable income and lifestyles that have become distinguished by the regular consumption of take-out and restaurant meals, according to Eli Lustgarten, senior research analyst at Longbow Research, Independence, Ohio.

So despite the reduction in disposable income resulting from higher prices people are paying for gasoline and other necessities, Lustgarten said statistics indicate the food-service industry is still growing.

Projections by the National Restaurant Association, Washington, indicate 2008 will be the 17th consecutive year of growth in restaurant industry sales, which are expected to total $558 billion, up 4.4 percent from $535 billion in 2007. Sales in 2007 were up 4.6 percent from 2006.

Restaurant sales have declined only three times in the past 36 years—in 1974, 1980 and 1991—each time occurring during an economic recession, Lustgarten said.

Even if 2008 becomes an anemic year for restaurant sales, he said stainless steel sales could still benefit because the competitive strength of the food equipment market is that replacement and renovation accounts for the bulk of sales.

The FES forecast also indicated that 53 percent of food-service operators plan to purchase equipment in 2008 as replacement for existing gear. Other equipment purchases will come as a result of renovations (18 percent) and new construction (14 percent), it said.

The restaurants most affected by the downturn are the casual dining entities like Max & Erma's, Applebee's and Ruby Tuesday, where customer traffic is off between 2 and 5 percent from last year, Robin Ashton, president and publisher of Foodservice Equipment Reports magazine, said. But such quick-service eateries as McDonald's have seen positive traffic and sales numbers through most of the past year, Ashton said.

However, "down" is a relative term since there's still positive growth.

Restaurant traffic rose 0.7 percent in 2007, its slowest level in recent years, according to NPD Group Inc., a Port Washington, N.Y.-based market research company that tracks restaurant sales and traffic. In recent memory, the slowest year was 2002, largely due to the Sept. 11, 2001, terrorist attack that led more people to stay home, it said.

"Things are still going on and the outlook is still for positive real growth," Ashton said. "It's next year that I see a slowdown."

The slowdown in sales could, in turn, translate into a slowdown in the purchasing of restaurant materials, which are already facing a recent inclination toward the substitution of traditional 300-series stainless with lower grades and other materials.

Ashton pointed to rising stainless steel prices as driving the move toward substitution. He cited figures from the National Association of Food Equipment Manufacturers, a trade group that researches sales figures, which said last year's average price on serving counters, steam tables and other heavy-use stainless items rose 16 percent from the previous year.

"Since things first got stupid in 2004 with stainless (prices), everybody in the business has done everything they can to flee to 200 or 400 series," he said. "It actually is beginning to have an effect."

Some restaurant implements can be made of plastic or aluminum, but prices of those materials also are increasing, Ashton said, adding, "the problem is you run out of alternatives."

Many restaurant chains have worldwide standards that mandate the use of Type 304 stainless, the traditional food-service material, Ashton said.

"It's becoming a heavily negotiated activity with field tests to get them to change specs to save themselves some money," he said, adding that while there has been movement toward substitution, the restaurant industry hasn't entirely switched to 200- or 400-series product.

"There are machinability aspects, and some of the stuff is a little more brittle," Ashton said. "And it gets expensive to turn over the tooling. Plus, when you have actual food contact, it's got to be 300 (series)."

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